China state sector a honey pot for corrupt officials

Charlie Zhu

HONG KONG (Reuters) - In March last year, after getting government approval to go ahead with a $900 million refinery expansion in China's southeastern Fujian province, state-run oil giant Sinopec Corp <0386.HK> warned the team handling the project against taking bribes.

"Project engineering and construction has been a main area for corruption at Sinopec," the Fujian unit of Asia's largest refiner said in a blunt memo, according to a Sinopec source who read it to Reuters. "All members, especially those in key posts, must treasure their positions, stay guarded and resist temptation."

The memo underscores what experts say is one of the biggest challenges facing President Xi Jinping and his drive to tackle corruption - rampant graft in engineering, procurement and construction contracts awarded by state firms.

Graft in the state sector has been acknowledged before but shot to the headlines recently when authorities stunned the energy industry with an investigation into five former senior executives at state-run oil and gas behemoth PetroChina <0857.HK> and its parent firm China National Petroleum Corp.

That investigation has raised questions about how far Xi will go to root out graft in an industry that ranks as one of the most powerful corners of the state-owned corporate sector.

Virtually all senior officials at state firms are members of the ruling Communist Party, whose power is largely unchecked.

And there is a lot of money on the table.

According to the European Union Chamber of Commerce in China, state enterprises issued tenders for goods and services worth 9.26 trillion yuan ($1.51 trillion) in 2011.

It's not clear how much of this was for engineering, procurement and construction contracts, commonly referred to as EPCs in the industry. Nor are there any figures for graft investigations into EPC contracts.

But China's petrochemical engineering market should be worth $40 billion by 2016 alone, according to industry data. China is also investing $65-$80 billion between 2012 and 2016 to expand its oil refining capacity.

"It's inevitable to have the corruption problem because of the high concentration of power at the top," Chen Weidong, chief energy researcher at CNOOC Group, parent of Chinese offshore oil giant CNOOC Ltd <0883.HK>, said of graft in tenders for energy EPC contracts in China.

"They hold public tenders for projects but the process of choosing winning bids is not open."

EX-RAILWAYS MINISTER CONVICTED

China has taken steps to curb graft in public procurement.

It passed laws in the early 2000s requiring tenders for state-funded projects with an estimated construction contract value of more than two million yuan or where the purchase of equipment would exceed one million yuan.

It has also sought to improve transparency with online platforms for purchases, although this cannot always be used because not all local governments or state entities have the system and a unified national procurement program has yet to be finished.

But industry officials and analysts say the process is still riddled with graft partly because China's rapid economic growth has fuelled a surge in fixed asset investment by the government and state firms that has often escaped proper oversight.

They say officials at state firms involved in tendering often accept bribes to award contracts or select companies run by relatives or friends. Irregularities include splitting a major project into pieces to dodge the tender process, they add.

One recent example was former railways minister Liu Zhijun, who was given a suspended death sentence this year for graft. Liu was found to have helped 11 people win railway contracts or get promotions in return for 64.6 million yuan in bribes between 1986 and 2011, official media said.

The party's top graft buster, the Central Commission for Discipline Inspection, last week called for an overhaul of how transactions take place for public resources - such as procurement and land transfers.

It gave no details and did not explain what prompted the commentary on its website, although it referred to the anti-corruption campaign Xi launched when he became party chief in November.

Officials from the commission or the agency overseeing major state-owned enterprises could not be reached for comment.

FIRST SINOPEC, NOW PETROCHINA

Sinopec vowed to step up its fight against graft after former chairman Chen Tonghai was given a suspended death sentence in 2009 for taking $32 million in bribes.

It has been relatively open about the problem - part of the 2012 memo was cited in a report posted on its website, including the following quote: "The number of major corruption cases at Sinopec has been on the rise, especially in the area of project tendering, contracting and sub-contracting and procurement."

Sinopec did not respond to a request for comment.

Its refinery expansion is taking place at a $6.5 billion refinery and petrochemical complex run jointly with Saudi Aramco and Exxon Mobil . The project is scheduled to be completed by the end of this year. There have been no public reports of any irregularities.

The focus, instead, is on PetroChina after the government in late August and early September said several of its former senior executives were being investigated for "serious discipline violations" - shorthand used to describe graft.

No details of the investigation have been released. PetroChina also did not respond to a request for comment.

Similarly, Chinese authorities have released no details about a probe into Wison Engineering Services Co Ltd <2236.HK>, a private contractor whose major customer in recent years has been PetroChina.

"Public procurement corruption is not limited to energy. It is across the board," said Lin Boqiang, director of the China Centre of Energy Economics at Xiamen University in Fujian and an adviser to China's National Energy Administration.

"The energy sector gets more attention as the projects they build are mostly huge."

EU CRITICAL OF CHINA PUBLIC PROCUREMENT

The European Union has criticized China for the murkiness of its public procurement and has called for a further opening of the market to foreign players.

"The bidding process ... still cannot be fully executed online, which inhibits optimal information sharing and transparency of the various entities' processes," the EU said in its 2013/14 annual China position paper.

To try to address some of the concerns, China's Finance Ministry is developing a nationwide government procurement system that will have a shared database and more e-commerce related functions to enable online bid appraisal and payments.

Still, some industry insiders don't believe a clean system will emerge anytime soon in the absence of a transparent decision-making process.

"Some of the tenders are conducted behind the curtain," said a Chinese oil industry official with knowledge of the public procurement process in the energy sector.

"It is not about whether there are rules and regulations. It's about implementation." ($1 = 6.1210 Chinese yuan)